IDIOM DESIGN AND CONSULTING LTD.

,
JO SE PH C HE MMA NU R H AL L, 1ST C RO SS , 1S T STA GE , I ND IR AN AG AR , BA NG AL OR E 560 038, I ND IA .

REVIVING THE MALLS

A “thought” paper on the current state of retail in Indian and the challenges facing Malls.

Though this “thought” paper does not profess to be a panacea for all the ills that Malls are faced
with currently, it will attempt to set a direction for future thought, with some key insights from the
traditional Indian market place, which have so far been hidden in plain view!

AUTHOR:
Shantanu Saha
RESEARCH ASSISTANTS (MICA GRADUATE TRAINEES):

Lakshmi Narayanee B
Sandeep Malhotra
Swetha Dandapani
 CONTENTS:
PAGE NO

1.0) THE INDIAN RETAIL SECTOR: THUS FAR 3

1.1) FACTS & FIGURES: THE RETAIL INDUSTRY (ICRIER REPORT 2008) 3

1.2) THE FACTORS RESPONSIBLE 4

2.0) CHARACTERISTICS OF UNORGANIZED RETAIL IN INDIA 5

3.0) CHARACTERISTICS OF ORGANIZED RETAIL IN INDIA 5

4.0) UNORGANIZED RETAIL VS ORGANISED RETAIL 7

5.0) MALLS: A NEW MODEL 7

5.1) THE FALL OF THE MALL: 7

5.2) SOME INSIGHTS AND SOLUTIONS 8

5.3) EARLY SHOPPING CENTERS 8

5.4) QUESTIONS 9

6.0) HOW DO WE DO THIS? 10

6.1) POSITIONING A MALL & DIFFRENTIATING IT: 10

6.2) FRIENDLY FINANCIALS 10
6.3) HOT BUTTONS TO REDUCE BARRIERS TO ENTRY 11

7.0) IN CONCLUSION: 12

SOURCES: 13

ANNEXURE A: A HYPOTHETICAL MODEL: Pay Per Resource Used Model 13

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1.0) THE INDIAN RETAIL SECTOR: THUS FAR

1.1) FACTS & FIGURES: THE RETAIL INDUSTRY (ICRIER REPORT 2008)

Retailing in India has evolving rapidly, with consumer spending growing by unprecedented rates and with
increasing number of global players investing in this sector. Organized retail in India is undergoing a
metamorphosis and is expected to scale up to meet global standards over the next five years.
India’s retail market has experienced enormous growth over the past decade, more than doubling in size
to US$ 322 billion in 2007-08.

The most significant period of growth for the sector was between years 2000 and 2006, when the sector
revenues increased by about 93.5 per cent translating to an average annual growth of 13.3 per cent. The
sector’s growth was partly a reflection of the impressive Indian economic growth and overall rise in
income levels of consumers.

The retail market in India witnessed an estimated gross turnover of USD 400 Billion in 2008-09.
The share of organized retail of this pie stands at an estimated 5.7%. The balance is attributed to
the unorganized sector. As per current trends, organized retailing in India will be 20% of total
retailing in India by 2020.

• The report forecasts that India's overall retail sector will grow 16 per cent a year, from $322 billion
(Approx. Rs 12,88,000 crore) in 2006-07 to $590 billion (Approx. Rs. 23,60,000 crore) by 2011-
12.

• Within this, unorganized retail, which accounts for nearly 94 percent of the market, will grow at 10
per cent annually.

• In contrast, organized retailers will grow at 40 to 50 percent a year to expand market share from 4
percent currently to 16 percent by 2011-12.

• The country is likely to see investments worth $35 billion (Approx. Rs 1,40,000 crore) in
organized retail during the next five-seven years.

• Nearly 70 percent of the investments will be made by top seven players, including Reliance
Industries, the Aditya Birla group, Bharti-WalMart, and the Future group.

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 • 93 per cent of the total investments would be in urban areas. The four metros will get 30 percent
of this.

• In terms of formats, 34 per cent of the $35 – billion (Approx. Rs 1,40,000 crore) investment is
projected to flow into super markets, followed by 32 percent into hyper markets and 23 per cent
into specific sectors like footwear, watches, apparel, among others.

• As the share of organized players in overall retail trade grows, the government will gain in terms
of tax revenues as it will be easier to collect sales taxes from organized retailers.

• If left alone, the unorganized sector, which accounts for more than 95% of all retail in India, will
emerge as "a major bottleneck to raising productivity in both agriculture and industry".

• The total sales turnover of India's organized retailers in 2006-07 was Rs 6,472 crore, or a mere
0.50 per cent of overall retail sales. Average sales were Rs 8,298 per sq ft. In 2006, the five retail
chains — Subhiksha, Trent, Future Group, ITC, Spencer's —accounted for 1,070 stores spread
across nearly 5.3 million sq. This is projected to rise to over 6,600 stores by 2010.

• The five firms, as well as the National Dairy Development Board (NDDB)'s Mother Dairy,
employed nearly 28,320 people in 2006-07. The number is expected to reach 800,000 by 2010.

1.2) THE FACTORS RESPONSIBLE

The factors responsible for the development of the retail sector in India can be broadly summarized as
follows:

• Rising incomes and improvements in infrastructure are enlarging consumer markets and
accelerating the convergence of consumer tastes. Looking at income classification, the National
Council of Applied Economic Research (NCAER) classified approximately 50% of the Indian
population as low income in 1994- 95; this is expected to decline to 17.8% by 2006-07.

• Liberalization of the Indian economy which has led to the opening up of the market for consumer
goods has helped the MNC brands like Kellogs, Unilever, Nestle, etc. to make significant inroads
into the vast consumer market by offering a wide range of choices to the Indian consumers. The
government policies being more liberalized and relaxed, especially with 51% FDI allowance on a
single branded outlet and the franchise models of operation attract the key players in global
markets.

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 • The urban paradigm has shifted and become more progressive. There is a substantial increase in
the number of nuclear families. The levels of disposable income as well as the spending
thresholds have upped significantly. So much so that the consumer spending in India has
increased by an impressive 75 per cent in the last four years and will quadruple in the next 20
years, according to AT Kearney. The great Indian middle class is proving to be super potent. All
these factors have also played a vital role in making the prospects of the retail sector look bright.

• Shift in consumer demand to foreign brands like McDonalds, Sony, Panasonic, etc. The huge
proportion of young population in India implies a demographic dividend for the retail sector since
this portion of the population is more brand conscious and ready for spending more on consumer
goods. Urban population today in increasingly becoming fashion conscious and hence brand
names are more important to them

• The internet revolution is making the Indian consumer more accessible to the growing influences
of domestic and foreign retail chains. Exposure to the internet and privatization of the television
channels also contributed immensely to shifts in consumer demands leading to the need for more
sophisticated retail chains to cater to their varied and specialized demands. Reach of satellite
T.V. channels is helping in creating awareness about global products for local markets.

• About 47% of India’s population is under the age of 20; and this will increase to 55% by 2015.
This young population, which is technology-savvy, watch more than 50 TV satellite channels, and
display the highest propensity to spend, will immensely contribute to the growth of the retail
sector in the country.

As India continues to get strongly integrated with the world economy riding the waves of globalization, the
retail sector is bound to take big leaps in the years to come.

Most of the organized retailing in the country has just started recently, and has been concentrated mainly
in the metro cities. India is the last large Asian economy to liberalize its retail sector.

Organized retailing in India has a huge scope because of the vast market and the growing consciousness
of the consumer about product quality and services. A study conducted by Fitch, expects the organized
retail industry to continue to grow rapidly, especially through increased levels of penetration in larger
towns and metros and also as it begins to spread to smaller cities and B class towns.

2.0) CHARACTERISTICS OF UNORGANIZED RETAIL IN INDIA

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Retail in India is essentially “unorganized.” 98% of the retail industry is made up of kirana stores, street
markets, hole-in-the-wall shops and roadside peddlers. The term “unorganized retail” is better understood
when comparing this form of retail to the organized retail that one is familiar with in developed countries.

Unorganized retail is characterized by:

1) Family-run stores: Traditional as well as first time Entrepreneurs
2) Lack of best practices when it comes to inventory control and supply-chain management
3) Lack of standardization
4) Essentially a sector populated by anyone who has something to sell
5) Low cost of operations, credit driven
6) A dominant ‘loyal’ customer base where a personal touch is ensured

Traditional retailing continues to be the backbone of the Indian retail industry, with
traditional/unorganized retailing contributing to over 95 per cent of total retail revenues. The
quintessential kirana outlets or the corner provision store formats constitute a major part of Indian retail
store formats.

Over 12 million small and medium retail outlets exist in India, the highest in any country. More
than 80 per cent of these are run as small family businesses. Prevalence of traditional retailing is
highly pronounced in small towns and cities with primary presence of neighborhood kirana stores, push-
cart vendors, melas and mandis. Organized formats are only in the initial stages of adoption in these
regions. Leading retail players in the industry are beginning to explore these markets and the rural
consumers are slowly beginning to embrace the newer organized retail formats.

3.0) CHARACTERISTICS OF ORGANIZED RETAIL IN INDIA

Organized retail in India is characterized largely by the following formats:

Department Stores

The largest form of organized retailing today is located mainly in metro cities, in proximity to urban
outskirts. Ranges from 20,000 sq ft to 50,000 sq ft. They lend an ideal shopping experience with an
amalgamation of product, service and entertainment, all under one common roof. Examples include
Shoppers Stop, Westside, Lifestyle and Pantaloon.

Specialty Stores

Chains such as Landmark, E-Zone, World of Titan, Crossword, RPG's Music World and the Times
Group's music chain Planet M, are focusing on specific market segments and have established
themselves strongly in their sectors.

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Discount Stores

As the name suggests, discount stores or factory outlets, offer discounts on the MRP through selling in
bulk reaching economies of scale or excess stock left over at the season. The product category can range
from a variety of perishable/ non perishable goods

Hyper marts/Supermarkets

Large self service outlets, catering to varied shopper needs are termed as Supermarkets. These are
located in or near residential high streets. These stores today contribute to 30% of all food & grocery
organized retail sales. Super Markets can further be classified in to mini supermarkets typically 1,000 sq ft
to 2,000 sq ft and large supermarkets ranging from of 3,500 sq ft to 5,000 sq ft. having a strong focus on
food & grocery and personal sales and Hypermarkets that range from 50,000 sq ft to 100,000 sq ft. To
name some, Big Bazaar, STAR Bazaar, Shop Rite.

Convenience Stores

These are relatively small stores 400-2,000 sq. feet located near residential areas. They stock a limited
range of high-turnover convenience products and are usually open for extended periods during the day,
seven days a week. Prices are slightly higher due to the convenience premium.

MBOs

Multi Brand outlets, also known as Category Killers, offer several brands across a single product
category. These usually do well in busy market places and Metros.

Malls

A large part of the retail boom has been fueled by the concept of the mall. A mall is classically defined as
a collection of independent retail stores (normally branded), services, and parking areas constructed and
maintained by a management firm as a unit. Some of the current iconic malls in India are the Forum &
Garuda Malls in Bangalore, Inorbit in Mumbai, The Great India Mall in the NCR Region to name a few.

A survey conducted and documented in the Jones Lang LaSalle Meghraj report, entitled “The Geography
of Opportunity -The India 50” (June, 2007) has identified 50 cities as potent organized retail hubs and
classified them into 5 broad categories

a. Maturing– Delhi, National Capital Region (NCR), Mumbai belong in this category and these
markets are seeing saturation.

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 b. Transitional– These include cities like Bangalore, Kolkata, Hyderabad, Pune, Chennai and
Ahmedabad. These cities are clubbed under this category due to their large corporate sectors,
high level of economic activity, above-average income and large middle class.

c. High-Growth– These are the ‘next’ retail destinations of Chandigarh, Jaipur, Ludhiana, Lucknow,
Kochi, Surat and Vadodara

d. Emerging– They include cities which are tourist oriented, and have setup infrastructure for IT
companies like Nagpur, Indore, Nasik, Bhubaneshwar, Vizag, Coimbatore, Mangalore, Mysore,
Thiruvananthapuram, Amritsar, Agra and Goa

e. Nascent– These offer the first-mover advantage as the income levels and corporate activities are
limited. The cities are Patna, Bhopal, Meerut, Asansol, Varanasi, Kolhapur and Sonepat

4.0) UNORGANISED RETAIL Vs ORGANISED RETAIL

Though this is a never ending debate and the 'mall generation' has always talked about the advantages of
organized retail, we need to focus on the positives of unorganized retail as well especially in the Indian
context.

A large customer-base in India is not the upper and upper middle class which have a steady corporate
income (by-and-large it is these people frequenting a Hypermarket). So, when the SEC B, C, D, E is
considered, these are the people that make up a whopping 80% of the population. These are the people
that buy 50ml of edible oil or 200gms of rice which is generally not available in a large chain mall. So, in
such cases a small kirana store comes to the rescue. This street-side store offers credit and also delivers
home.

The very fact that small players have not been hugely affected by the entry of the organized sector is
proof enough that these time-tested stores have their own TG and can survive quite well.

5.0) MALLS: A NEW MODEL

In 2009, the world witnessed a financial meltdown. It was in the wings, waiting to happen and when it did,
it caught us unawares. The world is flat and so we know now. The economic crisis facing both developed
and developing nations is here to stay and the double digit economic growths countries like India & China
were looking at have now become an optimist’s nightmare.

It is time for a reality check for all economic activities that were planned to fuel these GDP growths. A
McKinsey report on India had predicted that organized retailing would increase the efficiency and

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productivity of entire gamut of economic activities, and would help in achieving higher GDP growth. At
6%, the share of employment of retail in India is low, even when compared to Brazil (14%), and Poland
(12%). Fuelling this growth was the growth in development of the retail-specific properties and malls. One
will now have to look at the key factors that can affect & impact the retail viability in future.

In 2007, there are about a 100 malls operational at a pan-India level with an estimated area of 19 Million
sq ft. As per estimates available, there will about another 300 additional malls constructed across the
country by 2010

According to the new estimates available with Fitch, close to 25mn sq. ft. of retail space is being
developed and will be available for occupation over the next 36-48 months. Fitch expects organized retail
to capture 15%-20% market share by 2010.

5.1) THE FALL OF THE MALL:

Malls are not half full but half empty.

The new developers are in a quandary about how to fill them up, both with stores and shoppers. How we
now look at Mall Management will be a challenge for both the developers as well as the tenants.

Currently, though there is a projected growth of the number of malls that is going to populate India, it is an
obvious observation that malls are increasingly vacant. According to the report issued by the international
real estate consultant, Cushman & Wakefield, Delhi and its neighboring regions (NCR) witnessed a 24%
vacancy in its mall space in 2008. At Pune, the same figure is 15% though it witnessed a 67% decrease
in mall supply.

Correspondingly the supply of mall space has seen a decline of 54%. So, 11 million sq. ft of space which
was supposed to have come up in 2008 has been deferred since the demand from retailers declined.

Mall Management

The glamour quotient attached to the malls has accentuated the desire to venture into the mall wagon.
The sprawling and expansive malls in western countries serve as the beacons of inspiration for the
retailers. So much so, that every industrialist, in whatever domain is considering it as a probable option.
But, such a fitment in the Indian context needs to be evaluated and assessed.

The figures also hint at a lot of basic things that Indian malls lack. For instance mall developers do not
worry about promotions once store space is leased out. Predominantly most of these developers do not

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concentrate on the branding and marketing of the mall and cash in on the brand associated with the
retailers.

The key areas that both developers and tenants will have to look at are differentiated ways of looking at
the areas that broadly constitute “Mall management”:

1) Differentiate - There are cities heavily drenched in the mall boom face the ‘too-many-
malls’ syndrome. With minimal differentiation at that. There has to be a streak of
continuous novelty or freshness to keep anything going. Malls, when they came into
being was considered ‘an experience, in itself’ and not as just another shopping exercise.
That was how malls were differentiated from the rest of the formats. While they were spot
on at distinguishing and positioning uniquely, amidst the mall boom, the developers had
conveniently forgotten to churn out a distinctive USP for each of the malls. Work harder
to “differentiate” their product as much as the tenants will have to differentiate their
merchandize to bring back the shopper.

2) Zoning- formulating the right tenant mix and its placement in the mall. Not look at the
traditional National anchor + Brands+ vanilla retailers + Food Court + Multiplex route.
Revisit what works in the old shopping streets of India. A large service component is
conspicuously absent in our current malls.

3) Promotions and Marketing: Many mall developers look at malls as just another real estate
project. The building is appealingly built and the mall developers work to get the spaces
sold and then relax. No/negligible effort from the mall builder’s side to promote/market
would definitely prove to be a crucial blow. Innovative ways of doing this that addresses
the local catchment instead of a citywide/countrywide promotion done for brands.

4) Facility management- Infrastructure (is too much necessary?), traffic management and
ambience management, sustainability issues & neighborhood concerns.

A point to be noted here is that the malls in the other South East Asian countries are not
as massive as those in India. So, if an over capacity (hence resulting in low occupancy)
problem shoots up as might be the case already, the mall would never get kicked on
gainful modes. Rightsizing of malls is proving to be the need of the moment.

5) Lastly, the financial models applied to tenancy: this needs to be on the basis of “shared
risks”

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In the current scenario, the way malls innovate on all five elements will define the success or
failure of a mall and going into the future, will determine the effective usage and thus a return on
investment of all the mall spaces that are bound to be vacant for a long time to come.

5.2) SOME INSIGHTS

Though this paper does not profess to be a panacea for all the ills that Malls are faced with
currently, it will attempt to set a direction for future thought, with some key insights from the
traditional Indian market place, which have so far been hidden in plain view!

As part of this thought paper initiative, a good deal of observational and exploratory research was done to
understand the unorganized retailer’s and consumers’ sentiments. Those involved in the research study
include the small independent food outlets, thelawalas, pharmacies, diagnostic centers, travel agents,
wellness centers (offering specialist services like Yoga, aerobics, meditation etc), stationary shops,
sweet/snack outlets etc. It also includes studying the behavioral pattern of the current day consumers -
Who visits a mall and for what.

Unorganized Retail Behavior

The top of mind reason attributed to remain unorganized is the unmanageable, near impossible rentals.
The typical rents demanded are way higher because of the additional overheads like common area
maintenance charges, infrastructure etc. Thus they find the venture into a different format too risky an
affair monetarily. There is always the inertia of comfort which is hard to overcome.

The unorganized segment is skeptical about the kind of visibility they might get in the organized formats
like hypermarkets, malls etc. While they are chic, self made, compact and still visible in their established
localities and neighborhoods, the fraction of space in a mall is a worrying factor.

Apart from the inherent risks, they also feel there is a strong lack of expertise (ranging from positioning in
malls, the business models to the sophistication tagged with organized formats) which blocks the
unorganized sector to think towards ‘going organized’.

Consumer Behavior

The customer base is well established in most cases of unorganized formats. A substantial percentage of
these are inherited and this implies inheritance of the customer base as well. There is a lot of sentiment

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and empathy associated with such bonds. It was also found that they would want the coming generations
to continue in the same formats, a sign of deep content.

Consumer frequent malls not just for shopping but also for recreational and leisure needs. Conventionally
these needs were satisfied by a gamut of venues and activities which have run out of sight given the
urban life and culture. A mall has become more like a 'hangout' and not a place to buy stuff from. A major
percentage of mall goers look at it as an ‘experience’. But in cities that are sprinkled by malls and are
already on their way to saturation, people don’t really prefer one mall to the other. They look at aspects
like convenience, proximity and other external parameters. The implication is that there aint any mall that
offers an exclusive or a different experience that would propel a preference of one over the other. The
mall loyalty quotient if one were to define is literally nonexistent today. It is important to shift gears.
Maybe, we need to re look at the definition of a classic mall and get back to basics. It is a 20th-century
adaptation of the historical marketplace.

5.3) EARLY SHOPPING CENTERS

The rapid, post–liberalization retail ascendancy of India from the late 90’s onwards, had lead to the
creation of the “shopping centers” in the metros, represented the confluence of demographic,
technological, and institutional trends, affecting the retailing of goods and services. To name a few that
come back to memory: Bhikaji Cama Place, Mohan Singh Place, Palika Bazaar and the colony markets of
Sarojini Nagar, Karol Bagh, Lajpat Nagar and Greater Kailash (all in Delhi).

The center’s design, construction, and management, however, reflected not only the symbiosis of
peculiarly Indian circumstances, but also the rise of an aggressive new breed of entrepreneurs who
flourished in the post liberalization landscape of India: The real estate developer.

What did these “Shopping Centers” have that Malls do not?

A typical shopping center was characterized by the presence of a mix of both services as well as product
resellers. It was a place where a consumer would find all his “out sourced” requirements in one place. It
was an ecosystem that survived both a bull and a bear market. It contained by and large all or some of
the elements given below:

• Tutoring Classes

• Vocational Education Centers

• Counseling Centers for Overseas settlement

• Hotels & Restaurants & fast Food Joints

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 • Travel agents for foreign travel and Visa /Passport services

• STD/PCO- Mini Business centers

• Booking Agents for buses, railways and air

• An odd bank

• Other financial services/ pawn brokers/ money lenders etc.

• Real estate agents

• Driving Schools

• A small poly-clinic / dentist

• Tailors

• Shops for all kinds of merchandize (Food & Non-Food) with some general stores thrown in

• And the occasional exhibition / mela in a hall

5.4) QUESTIONS

What if we were to look at tenancy along these lines once again? Would this not help us re-position the
mall differently? Would this not force us to re look at zoning and layouts? Would this not impact the
promotions that were run? Would this not impact the financial models and the mall management practices
that are currently followed? And; lastly, would this not bring back the tenants & the footfalls?

6.0) HOW DO WE DO THIS?

The way to do this is basically in two ways. One is to re-look at how we position the Malls and look at
tenancy models that have a fair representation of service providers and not restrict the occupancy to only
lifestyle formats but a healthy mix of value and value lifestyle formats.

Secondly, look at financial models that are tenant friendly as well as gives the developer a guaranteed
income over the long term.

6.1) POSITIONING A MALL & DIFFRENTIATING IT:

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We have to re-define the category of goods and services offered based on demographics,
psychographics, competition in the neighborhood and look at newer catchment areas for the malls.
Currently malls stick to stocking general, clothing, consumer appliances and lifestyle/ personal-care
products. So, for specific needs, a consumer has to go to a local market or the ‘shopping center.'

So, for e.g., based on the demographics of the city/ area, the mall could follow a Metamarket Cluster
Model. This way we could have multiple clusters of products and services offered in various sectors and
the mall becomes a one-stop-shop for all needs of the consumer.

The scope of mall differentiation in India is limited to differentiation through format. Within that
differentiation practice, a majority of malls carry a mixed format, leading to differentiation only through size
and anchor store. If embedded aptly, mall differentiation is a practice that can create meaningful value for
consumers leading to increased footfall and higher space utilization.

We need to include a larger presence of service providers in the malls. What has stopped mall
developers from designating floors for educational services, Medical and health care services,
recreational and self development activities, exhibition spaces, travel and financial services and also
include the shopping and entertainment outlets?

The myth that malls cater only to the upper echelons of the society needs to be broken. Bring those
traditional “lower middle class” into a mall. We need to invite the local “biggies” in their respective
categories into this space (more so in Tier 2 towns). What if a mall had the Kanti Sweet shop, the Vijay
Lakshmi Saree store, the KGN grocery store, a poly clinic like the Medinova to name a few local brands?

6.2) FRIENDLY FINANCIALS:

We need to work out a financial structure that works for these kinds of retailers. Make the financials
attractive enough to bring in the unorganized retailers into the organized space or at least consider
opening of another establishment in it.

If you were to look at the current EBITDA of some generic organized retail formats operating in high
streets you would find that they vary from -6.5% for convenience / fresh & Grocery stores, 9.25% for
Departmental stores, 4.5% for Hypermarkets, 10.3 for Fashion and lifestyle stores vis-à-vis that of an
unorganized operator whose EBIDTA would be around 20-30% depending on the goods being sold. More
often it would be more that this, as he pays no rental and is manning the store himself with some help and
the property would be ancestral and thus capitalized. For organized retailers, the rental and staff
expenses itself would be about 10% to 12 % of the gross margin leaving them with very little.

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It is this fixed cost of operations that primarily deter the unorganized player from considering a
mall. The other softer issue is that malls are perceived to be premium locations and that their
customer set would not frequent these malls.

6.3) HOT BUTTONS TO REDUCE BARRIERS TO ENTRY

1. Top line sales directly impact the profit of retailers. A small increase in top line greatly
increases the profitability of a retailer as most of the expenses for a retailer like rent, staff,
management expenses etc. are fixed. For an unorganized retailer, there are either nil or
negligible fixed costs. . Research has shown that a 10% drop in sales can wipe out the entire
profitability whilst a 10% growth in sales can increase top line by over 100%.The promise of
higher sales through increased walk-ins can tilt the decision making in favor of
moving to a mall space.

2. A fractional increase in Gross margins can have a big impact on the profitability of a
retailer. The way to do this is by the introduction of private labels. An unorganized player,
by dint of his nature of business is selling private labels. Except for a few branded items,
the core SKU’s are either sold loose or re-packaged under his own name. Be it a branded
sweet seller like “Kantis” or a local saree seller or even a ready made MBO outlet. The
viability of such stores is much more promising then the branded, organized players
currently.

3. Visibility of the store increases greatly by placing it at a 'mall.' That way the retailer can
build a bigger consumer base. Currently an entire street might visit him, but his presence in a
mall will drive an entire city to buy from him.

4. One of the main factors effecting modern retail formats in malls is the cost of occupancy
and the operational costs. Occupancy costs in India are greatly influenced by the Carpet area
to Built up area ratio. The occupancy cost on the net carpet area utilized for retail could vary
between 50% to 100%. CAM (Common Area Maintenance) charges are getting higher year
on year. This coupled with the impending 12.5% service tax imposed on leased properties
has pushed up occupancy costs. So measures like Gross Margin Return on Footage
(GMROF); Gross Margin Return on Inventory (GMROI) and Gross Margin Return on labor
(GMROL) become yardsticks by which retail success is made or broken. If you were to use
the same measures for an unorganized Kirana store, all these measures would be extremely
healthy. Another reason why the entry barriers to a mall premises would seem daunting to
him. Thus novel and flexible rental models and lower occupancy cost models will make
a mall a favorable location to consider.

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A common practice in developed markets is the use of the revenue sharing model to determine rent.
Under this arrangement, the tenant will either pay a fixed monthly base rent as minimum guarantee
and/or a “percentage of sales” rent, which ever is higher. This is beneficial for both landlords and retailers
as the landlords are encouraged to organize promotional activities that would increase the retailers
revenues because they have a percentage share in it. This model works well both in a down turn when
the market is weak and he is hit with high rental costs as well as when the market is up, he makes large
profits that the developer has a fixed share of.

Another model that can be considered is a pay by use model or what exhibitions usually follow. The
option of a fixed cost, for a fixed trench of time, for usage of space is given to the retailer/service provider.
This way, the retailer can test the waters before plunging in and if he decides to continue, he is given the
option of shifting his rental model.

Or, a Zoning Based Model could be considered to attract several small players to enter into the mall

Therefore to reduce the entry barriers for the unorganized players, mall developers and mall
management companies need to look at ways and means of promising the unorganized player:

• An Increase in sales by being present in the malls through efforts to drive in traffic into them

• Increase in margins by providing him the freedom to operate as an entrepreneur and selling his
own brands

• Increase his consumer base by making him reach a larger population

• Reduce his cost of occupancy by designing the malls in such a way as to reduce the Carpet area
to Built up area ratio and thus the CAM charges

• Provide innovative Rental models to reduce the unorganized players cost of operation.

7.0) IN CONCLUSION:

The malls can be revived if we were look at a basket of measures and re-visit the Great Indian shopping
centers for the insights that made India a nation of shop keepers and work out financial models that help
maintain the entrepreneurial spirit that is intrinsically required to be successful in retailing as an
enterprise.

SOURCES:

ICRIER REPORT 2008

Indian Retail Sector – IBEF
CII Report on Retail Scenario in India

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Organized retail ‘Inquilab’ in India- A Stanford University Report
Adecco TISS Labour Market Research Initiatives (ATLMRI) - Employment in Retail Sector: A comparison
of unorganized and organized retail in India
Mckinsey Reports
Cushman & Wakefield Reports
Retail Association of India Publications
EUROMONITOR
Various web sites

ANNEXURE A

CERTAIN HYPOTHETICAL MODELS

Pay Per Resource Used Model

There is a possibility for existence of such a format wherein any entrepreneur could effectively commence
his retailing venture instantaneously, in spite of existing regulatory factors. The mall owner can act as a
‘marketing and retailing company’ on a floor or on multiple floors in his property wherein individual
retailers can sell under his banner.

The mall owner will provide all the resources (space, supporting services, manpower, equipments etc.) in
smaller units to enable individuals become retailers.

Consider these:

• A candle making hobbyist wishes to sell his home made designer candle one day every week.
• A cooking expert wishes to conduct workshops for two hours every day.
• A meditation trainer wishes to conduct classes twice a week.
• A home food supplier wishes to sell homemade dinner every evening for four hours.
• A doctor wishes to offer consultation twice a week to promote his clinic.
• A tuition center wants the space a couple of hours on each day of the week.

Multiple rental models to suit different types of retailers varying in length and commitment (from ‘per day
per slot’ to annual or multiple year contracts) could be adopted to maximize space utilization.

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Zoning based on levels of CAM services

Different retailers require different levels of services offered by mall thereby making the current rental
models an undesirable proposition for many smaller retailers to move in.

This can be tackled by creating zones with varied levels of services offered by mall. Along with catering to
the needs of retailer, such a zoning practice will also serve to specific consumer needs.

Consider these:

Stores on the outer ring of the mall building with openings/windows facing a drive way which use least
amount of CAM services can be a possibility. Imagine a consumer returning from work to home who
would not otherwise go into a mall to pick up some groceries since it is a time consuming activity. With the
proposed drive in shops she can pick up groceries without even getting out of her car.

A garden area which does not require air-conditioning and same amount of other CAM services can be a
zone for small retailers and street food stall owners to set up a store. Consumers will also look at it as a
differentiated venue since it is drawn from the conventional picnic outing.

Metamarket cluster model

According to Kotler, the concept of a metamarket is used to describe a cluster of complementary products
and services that are closely related in the minds of consumers but are spread across a diverse set of
industries. For instance, the automobile metamarket consists of automobile manufacturers, new car and
used car dealers, financing companies, insurance companies, mechanics, spare parts dealers, service
shops, auto magazines, classified auto ads in newspapers, and auto sites on the Internet. It is quite
obvious from the example that a metamarket would involve a good deal of the current unorganized
sectors, be it any industry. Instead of the banal mall, a cluster of multiple metamarkets could be set up.
The kind of metamarket cluster could be based on the demographics of the consumers belonging to each
city.

Consider a scenario where the supposed mall space is divided into metamarket zones- an education
metamarket zone would comprise a private tutor centre to a second hand book lending library to a small
stationery shop; a consumer electronics metamarket would consist of service centres, an E-zone, an
accessory store etc.